Errors in automated trading
Hello everyone
Surely you have heard about automated trading.
You may even have used it.
Today I want to talk about the mistakes that people make using automated trading.
Let's go!
1. Back testing or forward testing
Who really understands the creation of an adviser will be able to make the adviser bring 100% profit per month during back-testing, while trading with almost no risk.
But do not rely only on the results of back-testing. Checking the adviser on the history is of course important and useful, but what is really important is how the adviser shows itself in real trading. After all, you will not be able to earn on what has already been, you need to be able to earn in the future.
Therefore, it is very important to test any system on forward tests.
Forward testing is real–time testing in real market conditions. This means that all decisions are made based on the history of quotes, but only the result that is generated in real time is considered a true representation of performance.
2. Data accuracy
70%-80% of the data on the Forex market, including those provided by brokers, is complete nonsense.
Your system is as good as your data is, and if you can't rely on your data, then your system won't be able to do it either. Valuable data is quite expensive, and that's why so few people have it.
You need to be able to clean the data for the correct operation of the system.
A good system developer, even with a wonderful strategy, will fully understand its weaknesses and take appropriate actions to eliminate them.
3. Consider all expenses
There are a lot of costs associated with trading, brokers are very well aware of this, and you should also know this.
At a minimum, you should consider:
1) Spread – it is different on different instruments;
2) Commission expenses;
3) Slippage on various assets on which you are going to trade;
4) Broker delays in opening orders;
5) Infrastructure costs.
4. Risk and Capital management
The key to all trading systems lies in the rules of risk and capital management. In order to completely change the characteristics of the strategy, it is enough to change these rules a little.
The strategy developer must take into account all the details of his system. This is necessary not only to avoid everything that can blow up a trading account, but also for the purpose of emotional balance, in order to calmly leave your system or a working strategy and not interfere with it.
There is one more thing we try to do – it is a daily analysis of open/closed positions based on the current market situation.
This ensures that any gains or losses will be analyzed instantly. This avoids new such open positions and some emotional problems. This approach will quite easily confuse systems with unclear rules and those that have a rather attractive yield curve.
5. Investors are an emotional person
For those who plan to develop successfully, this point is key, and it must be taken into account by everyone who will invest their funds in trading systems. You should remember that although you may feel good with 30% drawdowns and wild fluctuations in your equity, your investors will not share such feelings.
If you want to move to the next level of development, you must cultivate a personality in which you can invest. As a rule, in the world of investments, this means applying a small leverage, allowing low drawdowns and earning consistent profits.
A common, time-tested method of evaluating investments is the Sharpe coefficient. For a good investment, it should be at least 3, the maximum leverage should be 10:1, and the drawdown should be no more than 10% of both equity and balance.
6. Consider the limitations
And the final key rule is that you need to know the limitations of your system. This includes both the trading conditions under which it will and will not work (no system is perfect) and its scaling. That is, if I pour $100 million into my account and my profit target is 2 points, then, most likely, slippage will swallow my entire profit target, and I will never see a profit from my investment.
Even the infrastructure you use needs to be taken into account. For example, the MT4 platform, which is used by most brokers, works so slowly that at the time of the NFP exit, the difference between your planned and actual market entry price will be 10 points. If your system is price sensitive, then it will kill it.
Yes, it happens. For the most part, our rules are based on common sense, but the vast majority of systems that we have encountered have never taken into account such errors. As a rule, even if the creators claim that the system takes them into account, this is not the case, since when answering these questions they are still far from understanding the essence.
Paying attention to these things at the very beginning will allow you to save a lot of time, effort and develop an exceptional personality in you.
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩💻
Surely you have heard about automated trading.
You may even have used it.
Today I want to talk about the mistakes that people make using automated trading.
Let's go!
1. Back testing or forward testing
Who really understands the creation of an adviser will be able to make the adviser bring 100% profit per month during back-testing, while trading with almost no risk.
But do not rely only on the results of back-testing. Checking the adviser on the history is of course important and useful, but what is really important is how the adviser shows itself in real trading. After all, you will not be able to earn on what has already been, you need to be able to earn in the future.
Therefore, it is very important to test any system on forward tests.
Forward testing is real–time testing in real market conditions. This means that all decisions are made based on the history of quotes, but only the result that is generated in real time is considered a true representation of performance.
2. Data accuracy
70%-80% of the data on the Forex market, including those provided by brokers, is complete nonsense.
Your system is as good as your data is, and if you can't rely on your data, then your system won't be able to do it either. Valuable data is quite expensive, and that's why so few people have it.
You need to be able to clean the data for the correct operation of the system.
A good system developer, even with a wonderful strategy, will fully understand its weaknesses and take appropriate actions to eliminate them.
3. Consider all expenses
There are a lot of costs associated with trading, brokers are very well aware of this, and you should also know this.
At a minimum, you should consider:
1) Spread – it is different on different instruments;
2) Commission expenses;
3) Slippage on various assets on which you are going to trade;
4) Broker delays in opening orders;
5) Infrastructure costs.
4. Risk and Capital management
The key to all trading systems lies in the rules of risk and capital management. In order to completely change the characteristics of the strategy, it is enough to change these rules a little.
The strategy developer must take into account all the details of his system. This is necessary not only to avoid everything that can blow up a trading account, but also for the purpose of emotional balance, in order to calmly leave your system or a working strategy and not interfere with it.
There is one more thing we try to do – it is a daily analysis of open/closed positions based on the current market situation.
This ensures that any gains or losses will be analyzed instantly. This avoids new such open positions and some emotional problems. This approach will quite easily confuse systems with unclear rules and those that have a rather attractive yield curve.
5. Investors are an emotional person
For those who plan to develop successfully, this point is key, and it must be taken into account by everyone who will invest their funds in trading systems. You should remember that although you may feel good with 30% drawdowns and wild fluctuations in your equity, your investors will not share such feelings.
If you want to move to the next level of development, you must cultivate a personality in which you can invest. As a rule, in the world of investments, this means applying a small leverage, allowing low drawdowns and earning consistent profits.
A common, time-tested method of evaluating investments is the Sharpe coefficient. For a good investment, it should be at least 3, the maximum leverage should be 10:1, and the drawdown should be no more than 10% of both equity and balance.
6. Consider the limitations
And the final key rule is that you need to know the limitations of your system. This includes both the trading conditions under which it will and will not work (no system is perfect) and its scaling. That is, if I pour $100 million into my account and my profit target is 2 points, then, most likely, slippage will swallow my entire profit target, and I will never see a profit from my investment.
Even the infrastructure you use needs to be taken into account. For example, the MT4 platform, which is used by most brokers, works so slowly that at the time of the NFP exit, the difference between your planned and actual market entry price will be 10 points. If your system is price sensitive, then it will kill it.
Yes, it happens. For the most part, our rules are based on common sense, but the vast majority of systems that we have encountered have never taken into account such errors. As a rule, even if the creators claim that the system takes them into account, this is not the case, since when answering these questions they are still far from understanding the essence.
Paying attention to these things at the very beginning will allow you to save a lot of time, effort and develop an exceptional personality in you.
Traders, if you liked this idea or if you have your own opinion about it, write in the comments. I will be glad 👩💻
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